Operating profit measures the surplus that the Group makes from selling jewellery, watches and other products and services. It depends on the cost of goods sold, the level of operating costs and other operating income. The most significant operating cost categories are staff, property operating lease rentals and marketing.
As many of the Group’s costs are comparatively fixed, sales per store is important in determining operating profit. To at least maintain its operating profit, the Group needs total sales growth sufficient to offset any adverse movement in gross margin and increases in operating expenses from both existing operations and new store selling space. The impact of changes in sales (either adverse or favourable) on operating profit is less in the US division than in the UK business, as certain expenses, such as staff costs and property rentals are more related to sales in the US.
Target: 7% to 9% per annum growth in Group operating profit at constant exchange rates over the economic cycle. As sales performance is a key driver of operating profit growth, the five year performance is expected to be below target until sales growth returns to its target range.
Definition: Group sales less cost of goods sold and administrative expenses; plus other operating income all at constant exchange rates (see Impact of constant exchange rates).
Performance: The 1.8% compound growth in operating profit was below target, due to the 16.5% decline in 2007/08 which reflected minimal sales growth.